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Berlin Court of Appeal: Bitcoin no units of account under the German Banking Act (KWG) and no e-money under the German Electronic Money Act (ZAG)

15/10/2018

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Germany

On 25 September 2018, the Berlin Court of Appeal (4th Criminal Senate) ruled that Bitcoins are not considered units of account within the meaning of the German Banking Act ("KWG"), nor are they considered e-money within the meaning of the German Payment Services Supervision Act ("ZAG").

It dismissed the appeal of the Public Prosecutor's Office against the ruling of the Berlin Regional Court of 15 November 2017, which already provided for an acquittal of the defendant (Case No. (4) 161 Ss 28/18 (35/18), 4 35/18)).
 
Background
 
The defendant operated an Internet trading platform through which Bitcoins could be traded. For this purpose the accused mediated buyers and sellers. The buyers had to register and deposit an appropriate amount of money into an account set up specifically for this purpose in order to be able to purchase Bitcoins. The sellers on the other hand could place their purchased Bitcoins via an account on the website and offer them publicly. The payments of the customers were transferred - mainly via Giropay - to a Polish account of a "conventional" commercial bank. As a result of the strong media interest in crypto currencies, the account balance of the defendant's platform increased within a few days from EUR 209,832.16 (as of March 27, 2013) to approximately EUR 2.45 million (as of April 15, 2013). On April 9, 2013, Polish authorities blocked the Polish account on suspicion of money laundering and the commercial bank terminated the defendant's account. The defendant then sought legal advice, and the trading platform went offline in April 2013.
 
 
Decision of the Court of Appeal
 
The KG Berlin denied that the defendant's actions were punishable, as trading in Bitcoins in the established form was not subject to authorisation - Bitcoins were not financial instruments within the meaning of the German Banking Act.
 
The court particularly stated that Bitcoins lacked general recognition and the corresponding foreseeable stability of value which would enable it to be used for the general comparison of different goods or services. However, this would mean that an essential conceptual requirement of units of account, as expressed in the legislator's equation with foreign exchange and the ECU used as an example in this context, would not be met.
 
As is well known, BaFin takes the opposite view in its leaflet on financial instruments. Here, the Court of Appeal makes statements which - to put it mildly - must be understood as a slap in the face for supervision: "[BaFin] fails to recognise that it is not the task of the federal authorities to intervene in the shaping of law (in particular) in criminal law. In its function as a rule of determination, Article 103 (2) GG contains the obligation to clarify essential questions of criminal liability or impunity in the democratic parliamentary decision-making process and to define the prerequisites for criminal liability in such concrete terms that the scope and application of the elements of crime can be recognised and determined by interpretation. The general principles of the rule of law that the legislature must make all essential decisions in the area of the exercise of fundamental rights itself and must formulate legal provisions as precisely as is possible according to the nature of the life circumstances to be regulated, taking into account the normative purpose, apply particularly strictly to the area of substantive criminal law, which is sensitive to fundamental rights. The requirement of certainty of Article 103.2 of the Basic Law therefore requires that the wording of criminal provisions be worded in such a way that the addressee of the provision can normally already foresee from the wording of the statutory provision whether conduct is punishable or not.  It is true that Section 6 KWG grants BaFin general supervision of maladministration and general authority to issue administrative acts directed against institutions. However, the aim of this provision is solely the preventive aversion of danger for the credit and financial services sector, but not the extension of the scope of application of criminal law norms by extending the requirements for the existence of banking transactions or financial services requiring a licence. The above-mentioned information sheet therefore has no legal character and cannot have such a character. By asserting that Bitcoins fall under the concept of units of account within the meaning of Section 1 (11) KWG, the Federal Financial Supervisory Authority is overstretching the scope of its assigned tasks. And further: "The legislature must itself determine the prerequisites for criminal liability and may not leave this decision to the organs of executive power."
 
The Court further stated that Bitcoin should not be e-money either. This was particularly so because at the time of the introduction of the law implementing the Second E-Money Directive, Bitcoins were already in circulation and other crypto-currencies were also being created. Nevertheless, the legislator has refrained from expressly regulating these in the KWG or ZAG and placing them under the supervision of BaFin.
 
 
Outlook
 
The ruling is a milestone in the development of a legal framework for cryptocurrencies. The classification of units of account as financial instruments according to the German Banking Act (KWG) has so far been a German exception and the community will breathe a sigh of relief that the KG has put a stop to this approach. However, nothing has been said on the question of when crypto-currencies are to be classified as securities and thus as financial instruments within the meaning of the German Securities Trading Act ("WpHG") in individual cases. In such cases, providers would of course possibly be involved in the area of investment consulting or brokerage or financial portfolio management and would in particular have to observe the rules of conduct of the WpHG and MaComp. The rules for insider trading and market manipulation would also have to be complied with in the case of a listing on a "crypto stock exchange", which might have to be classified as an MTF.
 
It is also possible that the German legislator will be called upon to take action and include explicit requirements for Bitcoin and other virtual currencies in the KWG and ZAG - in this respect, the industry is called upon to engage in close dialogue with the legislature.

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Finance

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Banking and Finance